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Breach of Convention

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A 2012 Comptroller and Auditor General report exposes how legislature’s authority was ignored by the Income Tax department while making refunds in crores.




By Devendra Singh

The parliament controls the purse strings of the nation. The budget, presented to parliament annually, enables the government to impose, abolish, remit, alter or regulate any tax, collect tax levied and withdraw money from the Consolidated Fund of India (CFI). There are set procedures to be followed to do this. However, there have been times when parliament is given a cold shoulder, completely in contravention of the constitution.

Shockingly, a Comptroller and Auditor General (CAG) report showed that interest refunds amounting to Rupees 10,499 crore were made by the Income Tax (IT) department in 2010-2011, and an aggregate refund of Rupees 137,365 crore was made between 2006 and 2011 without obtaining parliament’s approval. Apparently, the department had some administrative difficulty in projecting the interest payable on tax refunds. The CAG report was tabled in parliament in 2012. However, this is not tenable as the entire budget is prepared on sound assumptions and placed before parliament. It also has implications for efficiency and transparency in the working of parliament.



The CAG report had referred to the Public Accounts Committee (PAC) of parliament, which cross-examined the representative of the IT department. The PAC found no valid reason why the IT department could not make broad estimates of the interest liability on tax refunds based on trends of the past and seek excess grants where estimation fell short of parliamentary authorization.

The PAC recommended that the ministry of finance follow prescribed procedure and seek ex-post facto or ex-ante approval of parliament. But to its deep dismay, the IT department referred the matter to the attorney general (AG) who did a complete volte face and opined, inter alia, that “refund on excess tax is not expenditure and such outgo cannot be considered with other operational expenses, and interest on refund of excess tax is not seen as expenditure under Article 112(1).”

Flummoxed, the PAC issued a notice again to the IT department and decided to orally examine the AG. The PAC reiterated that interest payments on tax refunds must be shown in the annual financial statement or budget. Further, it said that no money shall be withdrawn from the CFI except under appropriation made by law and in the manner provided in the constitution.

Incidentally, Rule 8 of the Delegation of Financial Powers Rules, 1978, enumerates categories of expenditure. Along with salaries, medical treatment, etc, ‘interest’ is also classified as expenditure. Interest payments are the second largest component of revenue expenditure. These include payment of interest on public debt, insurance and pension funds, provident funds, reserve funds, deposits, interest on special securities issued to various central public enterprises and interest payment on borrowing. Every year, the government approximately incurs 5-7 per cent of the total expenditure on interest payments.

PAC’s examination also revealed that from 2000 to 2012, as much as 70-81 percent of the total disbursements for ministries/departments was charged on the CFI and this increased by 948 percent, i.e. from Rupees 4,05,289 crore in 2000-2001 to Rupees 38,40,960 crore in 2011-12. If such a large amount of expenditure can be charged on the CFI and withdrawn with the approval of parliament, there was no valid reason why the finance ministry should not make budgetary provisions for the expenditure on interest payment on refunds while submitting the Demands for Grants for approval by parliament.

For its work, the Constitution Review Commission hailed the PAC as the conscience-keeper of the nation in financial matters. Nothing should be done to dilute the authority or supremacy of parliament. Hopefully, the new government will give due weightage to PAC recommendations to reinstate parliamentary control over the public purse.

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